WPS7776 Policy Research Working Paper 7776 Public Disclosure Authorized Global Inequality The Implications of Thomas Piketty’s Capital in the 21st Century Public Disclosure Authorized Christoph Lakner Public Disclosure Authorized Public Disclosure Authorized Development Research Group Poverty and Inequality Team August 2016 Policy Research Working Paper 7776 Abstract In the 2000s, global inequality fell for the first time since increased in population-weighted terms, for the average the Industrial Revolution, driven by a decline in the disper- developing country the rise in inequality slowed down in sion of average incomes across countries. Between 1988 the second half of the 2000s. However, like any analysis and 2008, a period of rapidly increasing global integration, based on household surveys, these results could miss impor- income growth was largest for the global top 1 percent and tant increases in inequality if they are concentrated at the for country-deciles in Asia, often in the upper halves of the top. These data constraints remain especially serious in national distributions, while the poorer deciles in rich coun- developing countries where only very limited information tries lagged behind. Although within-country inequality on the top tail exists, especially regarding capital incomes. This paper is a product of the Poverty and Inequality Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Global Inequality: The Implications of Thomas Piketty’s Capital in the 21st Century By CHRISTOPH LAKNER* JEL classification: D31. Keywords: Income distribution, inequality, global inequality, globalization, top incomes * Development Economics Research Group, World Bank. I am very grateful to Espen Prydz and Matthew Wai-Poi for help with the data, and Heather Boushey, Francisco Ferreira, La-Bhus Fah Jirasavetakul, Branko Milanovic and Carmen Ye for very helpful comments. Prepared for After Piketty: the Inequality Agenda post-Capital in the 21st Century, edited by B. DeLong, H. Boushey and M. Steinbaum, Harvard University Press, 2017. Introduction This essay aims to complement Thomas Piketty’s analysis in Capital in the 21st Century (C21) by offering a twofold global perspective on inequality. First, I review the trends in global inequality, defined as the inequality among all persons in the world regardless of their country of residence. Piketty’s analysis, like most perspectives on inequality, concentrates on inequality among individuals within a country. Adopting a global (or cosmopolitan) perspective on inequality sheds light on another aspect of the world we live in. While no world government exists, international organizations play an increasing role, and the cosmopolitan view is the only one consistent with their mandates. Globalization has coincided with rapid growth in some of the poorest countries on the one hand, and increasing inequality in many of these same countries on the other hand. Global inequality captures the overall effect of these forces on persons irrespective of where they might be living. Second, I summarize the developments in within-country inequality in the developing world. This flows naturally from an analysis of the global distribution, which can be broken up into differences between and within countries. An analysis of global inequality needs to separate the recognition of inequality from the capacity to reduce it, which largely remains at the country- level (Anand and Segal, 2015). C21 documents a stark rise in inequality within developed economies in North America and Western Europe. Emerging economies do not feature prominently in the empirical work nor do they have an explicit role in the model. Milanovic (2014) argues that in Piketty’s model, developed countries today are what developing economies will look like in the future. For example, China today is a wealth-young economy, similar to the US in the 19th century, but given China’s fast demographic transition, it may be quite similar to today’s France in fifty years. So the transition path is very much the same, just at a much faster pace. Furthermore, Milanovic notes that emerging economies also affect C21’s inequality ݎ൐݃. On the one hand, given their lower capital stock, emerging markets continue to offer higher returns, pushing up ݎ, which Piketty recognizes as one of the mechanisms behind the apparent stability in ݎ. On the other hand, their higher growth rates push up ݃ thus delaying the point at which ݎ൐݃ materializes. Although Piketty’s model deals almost exclusively with developed Western nations, this has not stopped the book from achieving a global appeal. C21 has been widely translated, including into Chinese, Japanese and Korean, and reported in the local press (Brasor, 2015; Denney, 2014). More generally, the concern with inequality goes beyond the developed countries. For example, in a survey of 15 developing countries, 77% of policy makers recognize that the current level of inequality threatens long-term development, while only 7% see inequality as conducive to long- term development (UNDP, 2014). Similarly, in a survey of more than 500 policy makers in Asia, 70% suggest that the concern with income inequality increased in the last 10 years, while just over half disagreed that higher income inequality is acceptable as long as poverty is falling (Kanbur and Zhuang, 2012). A word of caution is needed right from the beginning. Expanding the analysis to a global level faces formidable data constraints. Due to the unavailability of administrative data for developing 2 countries, the analysis in this essay will use household surveys. It is well known that household surveys do a poor job at capturing top incomes and there is no reason why this issue should be any less severe in developing countries. Furthermore, as I will discuss in more detail below, household surveys in poor countries tend to use consumption expenditures – not incomes – which understates living standards at the top and thus understates levels (and possibly also trends) of inequality. Finally, those emerging economies which use income surveys typically do not capture capital incomes, and information on wealth – the very topic of C21 – is practically non-existent. Paraphrasing Atkinson and Bourguignon (2015), it is important to be very clear about what the data can and cannot say, while at the same time not rejecting all evidence on the grounds of imperfect measurement. The available evidence suggests that the Gini index of the global distribution of income has fallen for the first time since the Industrial Revolution, a development that is likely to continue. This decline was driven by falling inequality between countries, i.e. average incomes converged across countries. This is likely to continue, leading to further declines in global inequality. But this reduction was counteracted by an increase in (population-weighted) within-country inequality, such that the average person lived in a country where inequality was increasing. Looking at only developing countries, average national inequality increased during the 1980s and the 1990s while it declined in the 2000s. This recent fall was driven by Latin America, while China appears to have plateaued. The changes in global and within-country inequality coincided with rapid globalization since the late 1980s, enabled by technological change. It seems that globalization has had important distributional effects (within countries and globally), and between skilled and unskilled labor, as well as between capital and labor. This essay is structured in six main sections. I begin with describing the global distribution and trends in global inequality, drawing mostly on Lakner and Milanovic (2016). Section II moves from global inequality to inequality within-countries, especially within developing countries. In Section III, I discuss the role of globalization and technology in explaining some of these patterns. Policy implications are presented in Section IV. In Section V, I offer some predictions on the likely future direction of global inequality. Section VI concludes and outlines an agenda for future research on inequality in developing countries. I. The global distribution and trends in global inequality The analysis of the global distribution presented in this essay is based on joint research with Branko Milanovic (Lakner and Milanovic, 2016). We are interested in measuring the inequality of disposable income among all people in the world. Income is measured at the household level and every household member is assigned an